Low-cost carriers especially hit

As much as 30-40% of airline expenses is pegged to the US dollar

The rupee’s slide against the dollar is hurting domestic airlines, as 30-40 per cent of their expenses are estimated to be in dollars. Today, the rupee fell to a year’s low of 57/dollar in intra-day trade.

For sales in foreign markets, airlines earn in dollars. They also earn cash credits in dollars from aircraft and engine manufacturers on delivery but these earnings are non-recurring. Airlines with substantial international operations such as Air India and Jet Airways have a natural hedge against the rising dollar, because these companies also earn substantial foreign currency.

However, for low-cost airlines such as IndiGo, SpiceJet and GoAir, the scope of foreign earnings is limited. Lease and maintenance rentals of aircraft, salaries to expatriate pilots, parking and landing costs at international airports and jet fuel costs are dollar-denominated.

“About a third of our revenue comes in dollars and about 40 per cent of the expenses are in that currency. Over the last two months, the rupee has fallen about six per cent. So, we are going to see an impact in our costs. We have a natural hedge, but our revenue does not fully cover our dollar expenses. Eight to 10 per cent of the expenses are uncovered,” said a Jet Airways executive.

Other low-cost carriers are trying to increase dollar revenue by increasing sales in foreign markets. Only about 10 per cent of SpiceJet’s revenue came from international markets, a source said. IndiGo and SpiceJet did not respond to email queries for this story.

“At the moment, revenues in US dollars are marginal. However, as soon as we are allowed to start operating international flights, we forecast a more robust inflow in foreign currencies,” said GoAir chief executive Giorgio De Roni. “The devaluation of the rupee against the dollar has a significant negative impact on the airline’s cost structure. In fact, aircraft lease, most maintenance related costs and insurance costs are in dollars. Further, the weakness of the rupee translates into higher oil costs, a consistent downtrend of oil in international markets notwithstanding,” he added.

The fact that the second quarter (July-September) is traditionally weak is another concern for airline executives. Currently, the average fare in the domestic market is Rs 5,500-6,000 and it is expected this would fall, as the demand for travel drops with the reopening of schools and colleges. “The costs would remain high, but we wouldn’t be able to charge higher fares,” said an airline source.

The second quarter, however, is good for international business. Jet Airways is expecting an increase in dollar earnings. “Forward bookings on international routes are strong,” said the Jet executive. All the three listed airlines recorded losses in 2012-13 — Jet Airways saw a loss of Rs 485 crore on revenue of Rs 16,852 crore, while SpiceJet recorded a loss of Rs 191 crore on revenue of Rs 5,700 crore.  Kingfisher, which had suspended operations in October, recorded a loss of Rs 4,301 crore on revenue of Rs 500 crore.